The impact of the excess reserves of the banking sector on interest rates and money supply in Poland

Mariusz Kapuściński and Ilona Pietryka

No 300, NBP Working Papers from Narodowy Bank Polski

Abstract: In this study we aim to analyse the effects of leaving excess reserves in the banking sector by the central bank on the level and the variability of interest rates, as well as on money supply. To this end, we use mainly data for Poland, but in some cases, for robustness, also for a panel of Poland, the euro area, the Czech Republic and Hungary, as there had only been a limited variability in some policy variables in our sample for Poland. We estimate the parameters of GARCH, (P)VAR and (panel) linear regression models. We find that excess reserves affect the level and the variability of an overnight money market interest rate. However, the variability of the overnight money market interest rate, shaped to a large extent by excess reserves, does not affect the level of longer-term interest rates, and we find little evidence of its impact on their variability. Neither do excess reserves translate into higher money supply. Our results imply that the current monetary policy operational framework in Poland is adequate to ensure the transmission of the central bank policy rate to money market interest rates. Furthermore, it appears unlikely that raising the amount of excess reserves left, as proposed by some policymakers, would affect money supply. Instead, it would lower the money multiplier and the overnight money market interest rate, as well as increase its volatility.

Keywords: excess reserves; interest rate pass through; money multiplier; GARCH; VAR; panel data models (search for similar items in EconPapers)
JEL-codes: C32 C33 E43 E51 E52 (search for similar items in EconPapers)
Pages: 51
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-tra
Note: The authors would like to thank the participants of the seminar at Narodowy Bank Polski, Marta Korczak and Dorota Scibisz for their useful comments and the employees of the Magyar Nemzeti Bank for their kind help with data for Hungary.
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:300

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